3rd UPDATE: UK Darling: BOE To Announce Help For Mortgage Market

3rd UPDATE: UK Darling: BOE To Announce Help For Mortgage Market

(Adds more from Darling, details on loans.)

LONDON -(Dow Jones)- The Bank of England will announce Monday a scheme which will see it lend money to banks in return for collateral in a bid to help the troubled U.K. mortgage market, U.K. Chancellor of the Exchequer Alistair Darling said Sunday.

"The Bank of England will be making an announcement tomorrow in which what it will do is effectively lend banks money to unfreeze the (mortgage market) situation we've got at the moment," Darling said in a television interview on the British Broadcasting Corporation.

The global credit crunch has raised the cost of borrowing in wholesale markets and has seen demand for mortgage-backed securities plummet. That has cut many lenders off from the so-called securitization process which sees banks package mortgages and resell them to investors. As a result, banks have been withdrawing thousands of their more attractive mortgage products and, in many cases, raising the costs of the mortgage.

"What we're doing is trying to unbung that situation so that the bank will be making money available to the British banking system, it will be lending the money so it's got to be repaid, and they'll take security in return for it," he said.

Darling said the Bank of England loans will be secured against mortgage products. It has been reported the Bank would give highly liquid U.K. government bonds to the banks, which they could then sell on to raise cash.

Darling said he will make a statement in the House of Commons on this much-anticipated move Monday afternoon. He didn't give details of the size of the loan to banks, which analysts have said could be anywhere between GBP35 billion and GBP60 billion.

He also didn't specify a term for the loan. It is thought that the Bank of England will lend banks the money for one to three years.

There was no immediate comment from the Bank of England.

The Chancellor said this was an "essential step" in trying to normalize both the financial mortgage markets.

"The idea...is that it will open up the market and it will begin the process of opening up the mortgage market which of course will help house owners...if that doesn't happen, then I think there is every chance that the situation will get worse."

There's been growing evidence in recent weeks troubles in the mortgage market are feeding through to the housing market. Earlier this month, leading lender HBOS PLC (HBOS.LN) said house prices fell 2.5% in March, the biggest decline in 15.5 years. This week's survey by the Royal Institute of Chartered Surveyors showed the gloomiest outlook on house prices in 30 years.

While Darling acknowledged the government cannot tell banks what to do, he said there were steps he would like to see the banks take in return for the help. These include faster disclosure on the extent of their losses and exposure to risky credit products and showing how they are going to rebuild capital and raise money from shareholders.

"I think you will see much, much more of that," Darling said.

It is expected that Royal Bank of Scotland PLC (RBS) will announce a rights issue in the coming days in a bid to raise billions of pounds.

Darling also said he hoped with authorities acting to ease the strains in the mortgage market, the banks will start passing on rate cuts from the Bank of England.

"We are doing our bit and I would like to see the banks pass on the benefits of the three interest rate cuts we've had over the last few months," he said. The Bank of England has cut rates three times since December, taking the benchmark rate from 5.75% to 5.00%.

Meanwhile, Darling deflected calls for the government to reverse its abolition of the 10 pence in the pound tax rate for low income workers. The measure was announced in the budget of Darling's predecessor - now Prime Minister Gordon Brown - in 2007 but took effect this year.

There is said to be strong opposition to the plans among the governing Labour party's lawmakers and a number of them have spoken out on the issue.

Darling said he will return to the issue of poverty in future budgets, but "what I can't do is rewrite the budget."

"It isn't possible as you go into a financial year to unravel the whole thing and attempt to rewrite it," he said. "What I can say though is I intend in future budgets to return to this subject."

Despite opposition within his party, Darling said he was confident the finance bill will be approved when it goes before lawmakers next week.

Darling also spoke about rising food and energy prices, saying this was a "serious concern in economies the world over."

-By Laurence Norman, Dow Jones Newswires; 44 (0)207-842-9270; laurence.norman@dowjones.com

(END) Dow Jones Newswires

April 20, 2008 07:24 ET (11:24 GMT)